Category: Miscellaneous

I’ve been focused on creating the material for a July 5 three-hour presentation in Singapore. The format will be different to anything I have ever done so it’s taking quite a chunk of my time. The good news is I’ll have all done by tonight.

In the meantime, here’s an interesting piece by Dr Wealth on Nassim Tableb.

We completed Mastery last week. Undoubtedly is was the comprehensive and mentally exhausting course I have held – at least so far as I’m concerned.

How would I rate its success?

For me, a mixed bag: from incredible, unexpected results to disappointing. ‘Incredible’ because a couple of attendees made significant breakthroughs; ‘disappointing’ because some could have done much better.

What was the difference between the two groups?

The ‘success’ group gave it their all. Right from the start, I could see they were committed to living up to their highest potential – no matter what. They attended all the sessions and did all the assigned work irrespective of what was happening in their lives. Also, the quality of the assigned work showed they had put in time and effort.

The ‘failure’ group attended most of the meetings and did most of the assigned work – with the key distinctions being ‘all’ and ‘most’. Also, the ‘failure’ group’s quality of assigned was poor. The work resembled a hurriedly constructed piece with little thought.

So, what’s the takeaway? You want to succeed in the markets? Do the work! Commit to your own success without excuses and with a ‘whatever it takes‘. Come into trading with a determination less than that, and you’ll fail – not ‘if’ or ‘perhaps’ but ‘will’.

Of Mice and Men generated some emails. I was surprised; I didn’t anticipate the response.

I’ll look to answer the questions raised. One batch was similar to Omran’s – why change when the process is making money? Because as traders we need to improve – you can bet our competitors won’t and if we don’t change and get better, they will leave us behind. Tudor Jones, for example, is now embracing AI. At one point, Tudor believed that men were better than machines. But over time, his views have changed.

Another theme was the difference between the two approaches.

In one sense, there was no difference: my first principle is ‘protection of capital’. That idea runs true for both approaches. The difference is, with that achieved, how do we go about producing superior returns.

There is a direct relationship between timeframe and size of return. The shorter the timeframe, the smaller the average win. Consequently, we need a high win rate.

The major difference between the two is found in that idea. In short-term timeframes, we need to:

Take profits more quickly and

Be more aggressive when managing our trades – to ensure that once in profit, we don’t let the trade turn into a loss.

The above ensures a high win-rate.

For example, in the EURUSD entry I failed to take, I’d have been stopped out after having exited some positions at the first target. Still, the result for the trade would have been a gain of 64 pips for every 600K taken. That’s a reasonable return when you consider that the trade failed to get to the 2nd target – the one I call the ‘core profit’ exit.

The final difference between the two styles is the amount of time spent in front of the screen. Undoubtedly, the shorter timeframe is more exhausting. I am going to have to lose weight and exercise more!

This month I went to live-testing of a new (for me) approach to trading. It’s quite a departure from my usual style. My style has been based on the 18-day swing, (monthly trend). And, my aim has been to hold positions until a 13-week (quarterly trend) line turn.

The new strategy holds positions usually for no more than three days; the first exit is usually in a matter of hours.

In this test period, I have been trading half-position size, generated a 71.43 win rate and a 6.37% ROI. (Full size 12.74%). Annualised that ROI would be much better than my average, around 25% p.a.

To say, I’m very happy would be putting it mildly. So, how did the best-laid go astray?

Well, I had planned to take every signal, unless I had a good reason not to. Yesterday, I had decided not to take trades because of Memorial Day in the US. I thought it unlikely that there would be sufficient range to generate the first exit.

I should also mention my FX day ends at 17:00 EST and begins at 17:01 EST.

The EURUSD set up nicely for a sell signal. I went to bed reasonably early and actually got up at around 4:00 am. I had a quick gander at the EURUSD, and it was dead as a dodo. So I went back to bed thinking to place the entry and initial stop around 7:00 am this morning.

Only problem?

At 5:00 am (17:00 EST), the EURUSD triggered the sell and got to first exit later in the day. Under my rules, I have missed the trade and will wait for the next one. Natch on a backtesting basis, the trade would be counted as one that (at least) got to the first exit.

I post this because it’s a reminder that backtesting merely provides data of positive expectancy. It’s still up to us to execute. And because we are human, there’s many a slip between the cup and the lip. (And next time, I’ll stay up until 5:00 a.m. and then place my order!)

That’s today’s FT ‘Big Read’ on page 7. I’ll let you read the article for yourselves. One thing is clear: the advantage of being 71 with full mental faculties is you see how true is the statement – the more things change, the more they remain the same.

I began taking an interest in politics when I was 14 (1961). You can thank JFK for that. At that time, the Soviet Union was all the rage. The talk was how it would overhaul the US and how (and why) the one-party state would prove superior to a republic protection individual rights.

Then in the mid-1980s’, the talk was all about Japan – how its system was overhauling free enterprise.

Both the Soviet Union and Japan failed at the same time (`1991). The bottom line is the effect of economic laws can be postponed but not avoided.

Today, it’s the turn of China, and sadly, the USA.

The FT article about China is a classic example of why this time it will be different – it always is until it isn’t. At least FT, unlike the 1960s and 1980’s gives some reasons why this time it may not be.

At the other end of the political spectrum is the USA: same argument, this time we have the tools to make it different. We’ll see. The FED now needs to unwind its accumulated balance sheet without spooking the markets and without creating a major recession (unwinding may lead to high inflation which leads to unexpectedly high interest rates which lead to a recession). If the recession comes during the Trump presidency, no doubt he’ll be blamed for a recession/depression that was in the making before he took office.

That’s why I have shortened my trading timeframe. I don’t want to be caught in a 1987 type crash.

The function of entry is to buy us some time and space: after entry, the instrument moves favourably for some profit for some time. If it does this, it allows the room we need to manage our trade so as to ensure the worst result is breakeven.

Take Figure 1. There is a world of difference between an entry at 123.99 (green arrow) and one at 124.91 (red arrow). The latter gives us no time and space to manage a breakeven trade within the timeframe we are trading. Since I am trading a 5-day swing, I’ve found that the 60-minutes is the lowest timeframe I can expect follow-through to the end of day. Shifting down to lower timeframes exposes the trade an unacceptably high risk of whipsaw.

Finally, we have instrument selection. This element is especially important in FX. Over a large sample size, selecting the instruments to trade that result in profit is important. For example in Figure 2, the trader entered both pairs on May 12. The EURUSD is showing a profit of 302 pips, the EURJPY a profit of 40 pips.

So there you have it. What I view as the essential elements for success. In the piece, I wrote in order of importance. Let’s summarise in chronological order of a trade:

Today I want to look at ‘Subsequent’ Trade Management i.e. how do we manage trades once they have started to become profitable.

The strategy has to be different for individual traders – the approach depends on our trading stats and personality.

My philosophy is best expressed by Trader Vic in Principles of Professional Speculation. In order of importance:

Preservation of Capital

Consistent Profitability

Pursuit of Superior Returns.

As a result. I employ different trade management strategies when in Ebb Stage (than when I’m in Flow). When in Ebb, I take profits more quickly, and I am less patient when prices go against me.

For example, on Monday. May 15 I bought the GBPUSD at 1.2907. After rallying to 1.29560, it retreated to 1.28908. I exited the position at 1.28997. It’s now trading at 1.29618.

Any regrets at the early exit?

Nope: the only way I’d have captured the current move would have been to hang in. And, my stats show doing that in Ebb Stage, would produce a drawdown of between 15% to 21%.

Executing the current strategy keeps my losses tiny – I’m effectively flat until I have a winning month or two. But when I do have a winning run, my profits don’t have to chase losses. Applying this approach, I had my second best year in 2016.

Most retail traders ignore the next Essential – and it’s easy to understand why. When losses are viewed as unacceptable pain and profits as desired pleasure, trade management is seen as something to be ignored. Here’s the quandary trader’s face:

If I exit a position, and then it goes my way, I’ll feel bad. If I take a profit and the trade continues making money, I’ll feel bad.

If I don’t exit a position, and I lose even more money, I’ll feel bad. If I don’t take a profit and the trade then reverses, I’ll have left money on the table, and I’ll feel bad.

It’s damned if I do, and damned if I don’t.

To act on this Essential, we need to accept that losses are inevitable. I always dislike to lose money, but I accept the loss as a necessary consequence of doing business. With that acceptance, we can turn to a trade management strategy that best suits our personality and available time.

For me, I prefer to take small losses (with the risk of missing the occasional big profit). And, since I am a full-time trader, I can manage exits on an intra-day basis.

The result of the strategy is: most of my money is made in a month or two. The rest of the time my results tread water. The strategy calls for exiting on two levels:

a ‘soft’ stop – a situational exit. For example, if the trade fails to do ‘x’, I’ll exit immediately, and

a ‘hard’ stop – a price stop, placed in the market. If the price is reached, I am automatically out.

Figure 1 shows a swing strategy I employ:

This is a momentum trade. I buy on stop on the expectation that by day’s end, I’ll be in profit.

My ‘soft’ stop: by day’s end, the trade must not be in loss.

I took two trades both at the same price 123.97. The first I exited because, at day’s end, the EURJPY had failed to follow-through. I took the trade again the next day.

An alternative strategy is the Buffett type approach: we exit when the reasons for the trade are no longer valid. I know of some traders who are very successful using this method. But, it’s not for me. I’ve seen too many wipeouts to be comfortable with it

What is Essential Thinking? Stripping down a concept or activity to its core components.

In trading, for example, what are the essential components?

The core objective is to make money over a large sample size. How do we do that? In two ways, via

our win rate and

the relationship of our average dollar win to average dollar loss. The larger the skew to the win, the more likely it is we’ll make money.

There is an inverse relationship between the win rate and dollar win: the larger the win rate, the more likely it is our dollar win rate will drop. For example, the highest win rate tends to be among algo traders, the majority of whom, tend to be scalpers (or at least very short term traders).

The longer the timeframe, the more difficult it is to eliminate losses. Focusing on reducing the average dollar loss is probably a more worthwhile endeavour.

So, the essentials for the longer timeframe trader in his quest to make money from his trading is to have a positive expectancy. To do this, he’d be better off focusing on reducing the average dollar loss.

How to do this?

Well, first off is to have a set of rules for both our Method and Money – then to ensure we execute our a high degree of consistency. Consistent execution (provided we keep psych and equity journals) provides the data for improvement.

Our Money rules provide us with our optimal position sizing. My ideas here are perhaps different to most. I adjust my position sizing according to whether I am in Ebb, Normal, or Flow State – with increased size during Flow and decreased size during Ebb. Within the State size, I also increase and decrease my size depending on the setup I am using.

For example: My normal size for FX is around 2M. But, when in Ebb State the size drops to no more than 600K. So, my best setups in Ebb State will carry 600K; but, different setups will have different position sizes. It’s important to track the effects of adjusting the size. I do this by keeping accurate records and doing ‘what if’ scenarios. Here Edgewonk is very helpful.

Essentials so far:

Our objective is to make money over a large sample size.

Consistent execution of our Method and Money is a must.

To optimise our ROI, we need a set of position sizing rules. I prefer to vary my rules according to firstly my State and then my setup.